Dispersion is a measure of the average distance between the return of a set of assets usually against an index. Dispersion can measure the opportunity for stock selection. If there is no dispersion, there is no difference in stock returns, so an investor is not paid to make a distinction between these stocks. If there is wide dispersion, then there is a significant difference between stock returns. There is more uniqueness.
Dispersion is not the same as correlation although they are related. Although a negative relationship, dispersion and correlation do not have a linear relationship. The relationship between dispersion and volatility is ambiguous.
If the market is in a high correlation period, there is likely to be less dispersion because all stocks are moving together. Similarly, if there is a low correlation, there is likely to be higher dispersion. There will also be a difference during market upturns and downturns. Correlation and volatility will tend to move higher during a downturn and lower in an upturn.
Trend-followers should like greater dispersion since there is an increase in opportunities and should also like increasing dispersion. Wider dispersion should also lead to more diversification. Counter-trend traders will dislike rising dispersion but like falling dispersion.
No comments:
Post a Comment